Chemical Industry

Overview

The chemical industry covers a multitude of value creation steps from natural raw materials to chemical specialties. Since the first industrial manufacturing processes for chemicals in the 18^th century new processes and substance classes were developed leading not only to differentiation but also to entirely new industry segments. Not surprisingly, there is no generally accepted definition of the chemical industry. The distribution of global manufacturing in terms of output value is depicted in the following figure.

Value of manufacturing of chemicals by country

The most widely adopted standard is the Global Industry Classification Standard (GICS), treating the chemicals business sector as part of the materials section excluding pharmaceuticals. The classification developed by Morgan Stanley Capital International Inc. (MSCI) and Standard and Poor’s (S&P) is revised periodically. The overall market size was estimated to have been approximately USD 4,250 billion in 2021.^[2]

Market segments

The chemical industry as a manufacturing industry of tangible products starts with raw materials extracted from nature (e.g., by mining etc.) and transforms these materials into products for other industrial users or end consumers. Therefore, the product portfolio of the chemical industry covers a broad range of applications and different quantities.

Depending on the position in the value chain derived from the respective material processing step (see Figure below), industrial structure is different.

Processing steps and manufacturing activities in the chemical industry

Depending on the product, processing steps can be omitted as well as cycles of one or more processing steps added. Material flow in large chemical processing plants (until processing step of fine chemicals) is usually complex involving many steps and with usage of by-products from one process as feed stream for other processes.
Several approaches exist to classify products or segments of the chemical industry.^[4] Various authors differentiated between commodities or bulk chemicals covered by the first processing steps and specialty/fine chemicals in later processing, a segmentation now widely adopted in the industry.^[5] As a general rule for these segments, commodities have a low differentiation potential and a high production volume, while specialty chemicals often have unique properties and low production volumes, providing a higher differentiation potential.^[6] From a market point of view, chemicals are generally generic products with little potential for differentiation by brand names. Differentiation primarily relies on qualities like purity, material properties not offered by competing products, sometimes delivery reliability, additional services provided or, in case of bulk chemicals, price.^[7] From a production point of view, a company’s position in the entire industry structure is mainly determined by the position of the company’s products within this material flow and value chain. In the early stages of the value chain large-volume manufacturing occurs by means of continuous production processes in dedicated plants requiring high investment, while specialty chemicals s are typically located at later stages in the value chain and often produced in batches at much higher prices in multi-purpose plants.^[4] Another aspect to consider is the contribution of R&D to success within the different segments. The importance of R&D for success varies considerably between segments, with a tendency to increased relevance in the specialty chemicals segment.^[8]
By and large, the chemical industry is characterized by sizable investments and comparatively small numbers of personnel. The fewer process steps separate the individual company or market segment from the natural source and the higher material quantities, the higher the degree of automation and size of investments. On top of that, overall market trends like increasing ecologic standards combined with increasing demand fostered concentration of base and mass chemical producers in the western hemisphere even further.

In the past, a supplier shift occurred to economies with less strict ecologic regulations, especially for intermediates and fine chemicals. However, politics recently focussed on reversing this trend to increase delivery reliability.^[9] Furthermore, personnel as well investors more and more demand stricter standards for environmental protection making production in countries with weak environment protection laws distant from the place of usage increasingly uneconomical.^[10]
In consequence of all these trends, dissimilarities and interrelations, segments and their sub-divisions differ significantly from each other within the industry, depending on the customers’ market segment addressed, the amount of material throughput as well as the position in the value chain of the final product. For example, in the segment agrochemicals two large sub-segments exist: Fertilizers and crop protection (see figure above). While most fertilizers are close to natural sources or raw materials and therefore mass products, crop protection agents are compositions of high-value fine chemicals. Not only do the companies serving these sub-segments differ from each other but they also have considerably different research and development quotes.

More recently an increase in gas prices in Western Europe and the countries depending on Liquefied Natural Gas (LNG) in Asia lead to shifts in chemical production. The initial event was that Gazprom, the dominant external supplier for Western Europe, started to withhold supplies in Q4 2021, thereby increasing the global demand for LNG as alternative source. In consequence, LNG prices skyrocketed, especially after the proliferation of the Russo-Ukrainian War in 2022. While prices normalized again in 2023 they remained at a considerably higher level than until 2020, thereby putting a significant financial burden on Western European as well as Japanese chemical industry.

Natural gas price development in different global regions important for the chemical industry

The price increase can be attributed to market mechanisms as well as to the additional process steps and energy required to liquefy natural gas and subsequently expand it again prior to feeding it into the natural gas grid. Furthermore, while above graph depicts spot market prices additional taxes and duties as well as transport charges and the like might apply, thereby adding to the overall costs.

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Footnotes

1. The value is measured in billion current USD for the respective year. Countries with no reported value are colored grey.
2. See https://www.researchandmarkets.com/reports/5598260 .
3. Kannegiesser, M. (2008). Value Chain Management in the Chemical Industry. Physica-Verlag HD. https://link.springer.com/book/10.1007/978-3-7908-2032-4.[footnote]Leker, J., & Utikal, H. (2018). Management Challenges in the Chemical and Pharmaceutical Industry. In J. Leker, C. V. Gelhard, & S. von Delft (Eds.), Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry (pp. 3–30). Wiley-Blackwell. https://doi.org/10.1002/9781118858547.ch1.
4. Leker, J., & Utikal, H. (2018). Management Challenges in the Chemical and Pharmaceutical Industry. In J. Leker, C. V. Gelhard, & S. von Delft (Eds.), Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry (pp. 3–30). Wiley-Blackwell. https://doi.org/10.1002/9781118858547.ch1.
5. Kline, C. H. (1976). Maximising Profits in Chemicals. Chemtech, 6(2), 110–117.
   Rooij, A. van. (2007). The Company that Changed Itself: R&D and the Transformations of DSM. Amsterdam University Press.
6. Kannegiesser, M. (2008). Value Chain Management in the Chemical Industry. Physica-Verlag HD. https://link.springer.com/book/10.1007/978-3-7908-2032-4.
7. Delft, S. van. (2018). Designing and Transforming Business Models. In J. Leker, C. V. Gelhard, & S. von Delft (Eds.), Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry (pp. 231–275). Wiley-Blackwell. https://doi.org/10.1002/9781118858547.ch7.
8. Arvanitis, R., & Villavicencio, D. (2000). Learning and Innovation in the Chemical Industry. In M. Cimoli (Ed.), Developing Innovation Systems: Mexico in a Global Context (pp. 189–205). Continuum.
   Leker, J., & Utikal, H. (2018). Management Challenges in the Chemical and Pharmaceutical Industry. In J. Leker, C. V. Gelhard, & S. von Delft (Eds.), Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry (pp. 3–30). Wiley-Blackwell. https://doi.org/10.1002/9781118858547.ch1.
9. Raza, W., Grumiller, J., Grohs, H., Essletzbichler, J., & Pintar, N. (2021). Post Covid-19 value chains: options for reshoring production back to Europe in a globalised economy. Directorate General for External Policies of the Union, European Union. https://www.europarl.europa.eu/thinktank/en/document/EXPO_STU(2021)653626.
10. Castleman, B. I. (1995). The Migration of Industrial Hazards. International Journal of Occupational and Environmental Health, 1(2), 85–96. https://doi.org/10.1179/oeh.1995.1.2.85.
    Gill, F. L., Viswanathan, K. K., & Abdul Karim, M. Z. (2018). The Critical Review of the Pollution Haven Hypothesis (PHH). International Journal of Energy Economics and Policy, 8(1), 167–174. Retrieved from https://www.econjournals.com/index.php/ijeep/article/view/5678.
    Wu, J., Wei, Y. D., Chen, W., & Yuan, F. (2019). Environmental regulations and redistribution of polluting industries in transitional China: Understanding regional and industrial differences. Journal of Cleaner Production, 206, 142–155. https://doi.org/10.1016/j.jclepro.2018.09.042.
11. Data for Henry Hub and global price for LNG, Asia were gathered from The Federal Reserve Bank of St. Louis at https://fred.stlouisfed.org/categories/32217, exchange rates from the same source at https://fred.stlouisfed.org/series/DEXUSEU. Data for Dutch TTF natural gas futures were obtained from yahoo!finance at https://finance.yahoo.com/quote/TTF%3DF/history/. Data converted and scaled respectively.